##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended July 30, 2006
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                    to
 Commission File Number 001-13927
 CSK Auto Corporation
 (Exact name of registrant as specified in its charter)
 Delaware
    
    86-0765798(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)645 E. Missouri Ave. 
Suite 400, 
Phoenix, Arizona(Address of principal executive offices)
    
    85012(Zip Code)
 (602) 265-9200  (Registrants telephone number, including area code)
 N/A  (Former name, former address and former fiscal year,
if changed since last report)
 o þ
  þ o o
 o þ




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##### 



TABLE OF CONTENTS
 PageExplanatory Note
    
    
    2Forward-Looking Statements
    
    
    3PART I  Financial InformationItem 1. Financial Statements (unaudited)Consolidated Balance Sheets
    
    
    4Consolidated Statements of Operations
    
    
    5Consolidated Statement of Stockholders Equity
    
    
    6Consolidated Statements of Cash Flows
    
    
    7Notes to Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    36Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    47Item 4. Controls and Procedures
    
    
    48PART II  Other InformationItem 1. Legal Proceedings
    
    
    54Item 1A. Risk Factors
    
    
    54Item 6. Exhibits
    
    
    54Signature
    
    
    55EX-31.01EX-31.02EX=32.01
   www.cskauto.com,
 
 Explanatory Note
    2




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Note Concerning Forward-Looking Information
    3




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PART I
 FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 CSK AUTO CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 July 30,
    
    
    January 29,2006
    
    
    2006ASSETSCash and cash equivalents
    
    $
    21,201
    
    
    $
    17,964Receivables, net of allowances of $440 and $436, respectively
    
    
    38,716
    
    
    
    29,861Inventories
    
    
    517,343
    
    
    
    508,507Deferred income taxes
    
    
    42,920
    
    
    
    37,806Prepaid expenses and other current assets
    
    
    21,546
    
    
    
    20,047Total current assets
    
    
    641,726
    
    
    
    614,185Property and equipment, net
    
    
    170,188
    
    
    
    174,112Intangibles, net
    
    
    69,729
    
    
    
    71,807Goodwill
    
    
    223,507
    
    
    
    223,507Deferred income taxes
    
    
    9,734
    
    
    
    20,845Other assets, net
    
    
    37,411
    
    
    
    35,578Total assets
    
    $
    1,152,295
    
    
    $
    1,140,034LIABILITIES AND STOCKHOLDERS EQUITYAccounts payable
    
    $
    253,140
    
    
    $
    208,507Accrued payroll and related expenses
    
    
    56,158
    
    
    
    48,483Accrued expenses and other current liabilities
    
    
    83,915
    
    
    
    89,141Current maturities of long-term debt
    
    
    10,649
    
    
    
    42,465Current maturities of capital lease obligations
    
    
    9,332
    
    
    
    9,500Total current liabilities
    
    
    413,194
    
    
    
    398,096Long-term debt
    
    
    508,611
    
    
    
    507,523Obligations under capital leases
    
    
    15,590
    
    
    
    18,106Other liabilities
    
    
    48,191
    
    
    
    60,152Total non-current liabilities
    
    
    572,392
    
    
    
    585,781Commitments and contingenciesStockholders equity:Common stock, $0.01 par value, 90,000,000 shares authorized,
43,864,232 and 43,830,322 shares issued and outstanding at
July 30, 2006 and January 29, 2006, respectively
    
    
    439
    
    
    
    438Deferred compensation
    
    
    
    
    
    
    (1,735
    )Additional paid-in capital
    
    
    431,002
    
    
    
    426,560Accumulated deficit
    
    
    (264,732
    )
    
    
    (269,106
    )Total stockholders equity
    
    
    166,709
    
    
    
    156,157Total liabilities and stockholders equity
    
    $
    1,152,295
    
    
    $
    1,140,034
  4




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CSK AUTO CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Thirteen Weeks Ended
    
    
    Twenty-Six Weeks EndedJuly 30,
    
    
    July 31,
    
    
    July 30,
    
    
    July 31,2006
    
    
    2005
    
    
    2006
    
    
    2005(Restated)
    
    
    
    
    
    
    (Restated)Net sales
    
    $
    488,742
    
    
    $
    426,604
    
    
    $
    952,510
    
    
    $
    831,880Cost of sales
    
    
    256,189
    
    
    
    223,864
    
    
    
    504,762
    
    
    
    434,136Gross profit
    
    
    232,553
    
    
    
    202,740
    
    
    
    447,748
    
    
    
    397,744Other costs and expenses:Operating and administrative
    
    
    199,629
    
    
    
    161,043
    
    
    
    381,759
    
    
    
    319,037Investigation and restatement costs
    
    
    11,962
    
    
    
    
    
    
    
    15,632
    
    
    
    Store closing costs
    
    
    499
    
    
    
    671
    
    
    
    681
    
    
    
    1,015Operating profit
    
    
    20,463
    
    
    
    41,026
    
    
    
    49,676
    
    
    
    77,692Interest expense
    
    
    10,999
    
    
    
    8,439
    
    
    
    21,320
    
    
    
    17,165Loss on debt retirement
    
    
    19,336
    
    
    
    1,600
    
    
    
    19,336
    
    
    
    1,600Income (loss) before income taxes and cumulative effect of
change in accounting principle
    
    
    (9,872
    )
    
    
    30,987
    
    
    
    9,020
    
    
    
    58,927Income tax expense (benefit)
    
    
    (4,055
    )
    
    
    12,151
    
    
    
    3,680
    
    
    
    23,109Income (loss) before cumulative effect of change in
accounting principle
    
    
    (5,817
    )
    
    
    18,836
    
    
    
    5,340
    
    
    
    35,818Cumulative effect of change in accounting principle, net of tax
    
    
    
    
    
    
    
    
    
    
    966
    
    
    
    Net income (loss)
    
    $
    (5,817
    )
    
    $
    18,836
    
    
    $
    4,374
    
    
    $
    35,818Basic earnings per share:Income (loss) before cumulative effect of change in
accounting principle
    
    $
    (0.13
    )
    
    $
    0.42
    
    
    $
    0.12
    
    
    $
    0.79Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    0.02
    
    
    
    Net income (loss) per share
    
    $
    (0.13
    )
    
    $
    0.42
    
    
    $
    0.10
    
    
    $
    0.79Shares used in computing per share amounts
    
    
    43,855
    
    
    
    45,135
    
    
    
    43,849
    
    
    
    45,133Diluted earnings per share:Income (loss) before cumulative effect of change in
accounting principle
    
    $
    (0.13
    )
    
    $
    0.41
    
    
    $
    0.12
    
    
    $
    0.78Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    0.02
    
    
    
    Net income (loss) per share
    
    $
    (0.13
    )
    
    $
    0.41
    
    
    $
    0.10
    
    
    $
    0.78Shares used in computing per share amounts
    
    
    43,855
    
    
    
    45,539
    
    
    
    44,126
    
    
    
    45,514
  5




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CSK AUTO CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
 AdditionalCommon Stock
    
    Paid-in
    
    Deferred
    
    Accumulated
    
    TotalShares
    
    Amount
    
    Capital
    
    Compensation
    
    Deficit
    
    EquityBalances at January 29, 2006
    
    
    43,830,322
    
    
    $
    438
    
    
    $
    426,560
    
    
    $
    (1,735
    )
    
    $
    (269,106
    )
    
    $
    156,157Restricted stock
    
    
    13,710
    
    
    
    
    
    
    
    (95
    )
    
    
    
    
    
    
    
    
    
    
    (95
    )Adoption of SFAS No. 123R (Note 3)
    
    
    
    
    
    
    
    
    
    
    (1,735
    )
    
    
    1,735
    
    
    
    
    
    
    
    Exercise of options
    
    
    20,200
    
    
    
    1
    
    
    
    264
    
    
    
    
    
    
    
    
    
    
    
    265Compensation expense, stock-based awards
    
    
    
    
    
    
    
    
    
    
    1,333
    
    
    
    
    
    
    
    
    
    
    
    1,333Discount on senior exchangeable notes,
net of tax
    
    
    
    
    
    
    
    
    
    
    4,675
    
    
    
    
    
    
    
    
    
    
    
    4,675Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,374
    
    
    
    4,374Balances at July 30, 2006
    
    
    43,864,232
    
    
    $
    439
    
    
    $
    431,002
    
    
    $
    
    
    
    $
    (264,732
    )
    
    $
    166,709
  6




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CSK AUTO CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Twenty-Six Weeks EndedJuly 30,
    
    
    July 31,2006
    
    
    2005(Restated)Cash flows provided by (used in) operating activities:Net income
    
    $
    4,374
    
    
    $
    35,818Adjustments:Depreciation and amortization on property and equipment
    
    
    20,273
    
    
    
    15,997Amortization of other items
    
    
    2,713
    
    
    
    1,802Amortization of debt discount and deferred financing costs
    
    
    3,386
    
    
    
    914Stock-based compensation expense
    
    
    2,129
    
    
    
    213Tax benefit relating to exercise of stock options
    
    
    
    
    
    
    193Write downs on disposal of property, equipment and other assets
    
    
    2,485
    
    
    
    655Loss on debt retirement
    
    
    8,496
    
    
    
    1,600Deferred income taxes
    
    
    2,970
    
    
    
    21,176Changes in operating assets and liabilities:Receivables
    
    
    (8,855
    )
    
    
    (15,313
    )Inventories
    
    
    (10,424
    )
    
    
    (36,671
    )Prepaid expenses and other current assets
    
    
    (1,499
    )
    
    
    10,503Accounts payable
    
    
    44,633
    
    
    
    40,950Accrued payroll, accrued expenses, and other current liabilities
    
    
    (897
    )
    
    
    2,263Other operating activities
    
    
    (647
    )
    
    
    879Net cash provided by operating activities
    
    
    69,137
    
    
    
    80,979Cash flows used in investing activities:Capital expenditures
    
    
    (16,326
    )
    
    
    (13,638
    )Business acquisition
    
    
    (1,626
    )
    
    
    Other investing activities
    
    
    (865
    )
    
    
    (702
    )Net cash used in investing activities
    
    
    (18,817
    )
    
    
    (14,340
    )Cash flows provided by (used in) financing activities:Payments under senior credit facility  term loan
    
    
    
    
    
    
    (252,450
    )Borrowings under senior credit facility  line of credit
    
    
    56,900
    
    
    
    79,000Payments under senior credit facility  line of credit
    
    
    (86,900
    )
    
    
    Borrowings under term loan facility
    
    
    350,000
    
    
    
    Payment of debt issuance costs
    
    
    (12,308
    )
    
    
    (3,985
    )Proceeds from 3.375% exchangeable notes
    
    
    
    
    
    
    110,000Retirement of 3.375% exchangeable notes
    
    
    (125,000
    )
    
    
    Retirement of 7% senior notes
    
    
    (224,960
    )
    
    
    Payments on capital lease obligations
    
    
    (5,157
    )
    
    
    (5,731
    )Proceeds from seller financing arrangements
    
    
    428
    
    
    
    1,460Payments on seller financing arrangements
    
    
    (228
    )
    
    
    (151
    )Proceeds from repayment of stockholder receivable
    
    
    
    
    
    
    10Proceeds from exercise of stock options
    
    
    265
    
    
    
    728Purchase of common stock
    
    
    
    
    
    
    (25,029
    )Premium on common stock call option
    
    
    
    
    
    
    (24,040
    )Premium from common stock warrants
    
    
    
    
    
    
    15,850Other financing activities
    
    
    (123
    )
    
    
    (136
    )Net cash used in financing activities
    
    
    (47,083
    )
    
    
    (104,474
    )Net increase (decrease) in cash
    
    
    3,237
    
    
    
    (37,835
    )Cash and cash equivalents, beginning of period
    
    
    17,964
    
    
    
    56,229Cash and cash equivalents, end of period
    
    $
    21,201
    
    
    $
    18,394
  7




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CSK AUTO CORPORATION AND SUBSIDIARIES
 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
    Note 1  Basis of Presentation
  Use of Estimates
   Note 2  Audit Committee Investigation and Restatement of Consolidated Financial Statements
 Overview
   8




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CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
    Thirteen Weeks Ended
    
    
    Twenty-Six Weeks EndedJuly 31, 2005
    
    
    July 31, 2005Net income, as previously reported
    
    $
    13,058
    
    
    $
    21,103Increase in net sales
    
    
    7,556
    
    
    
    15,631Increase in cost of sales
    
    
    (2,601
    )
    
    
    (4,419
    )Increase in vendor allowance recognition
    
    
    4,819
    
    
    
    13,583Other adjustments
    
    
    (113
    )
    
    
    (253
    )Increase in interest expense
    
    
    (139
    )
    
    
    (295
    )Total restatement adjustments
    
    
    9,522
    
    
    
    24,247Increase in income tax provision
    
    
    3,744
    
    
    
    9,532Impact of restatement items, net of taxes
    
    
    5,778
    
    
    
    14,715Net income, as restated
    
    $
    18,836
    
    
    $
    35,818Earnings per share:Basic, as previously reported
    
    $
    0.29
    
    
    $
    0.47Impact of restatement items, net of taxes
    
    
    0.13
    
    
    
    0.32Basic, as restated
    
    $
    0.42
    
    
    $
    0.79Diluted, as previously reported
    
    $
    0.29
    
    
    $
    0.46Impact of restatement items, net of taxes
    
    
    0.12
    
    
    
    0.32Diluted, as restated
    
    $
    0.41
    
    
    $
    0.78
 Net sales restatement adjustments
  9




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CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
     Thirteen Weeks Ended
    
    
    Twenty-Six Weeks EndedJuly 31, 2005
    
    
    July 31, 2005Net sales adjustmentsCore returns from customers
    
    $
    8,659
    
    
    $
    17,092Rebates to customers
    
    
    (1,006
    )
    
    
    (1,348
    )Allowance for sales returns
    
    
    (97
    )
    
    
    (113
    )Increase in net sales
    
    $
    7,556
    
    
    $
    15,631Cost of sales related to net sales adjustmentsCore returns from customers
    
    $
    (8,659
    )
    
    $
    (17,092
    )Rebates to customers
    
    
    1,006
    
    
    
    1,348Allowance for sales returns
    
    
    56
    
    
    
    (92
    )Increase in cost of sales related to net sales adjustments
    
    
    (7,597
    )
    
    
    (15,836
    )Other cost of sales adjustmentsShrink adjustments
    
    
    116
    
    
    
    (350
    )In-transit inventory
    
    
    (474
    )
    
    
    (67
    )General ledger adjustments
    
    
    1,572
    
    
    
    3,598Warranty cost adjustments
    
    
    2,128
    
    
    
    4,415Overhead cost capitalization
    
    
    1,407
    
    
    
    2,026Other
    
    
    247
    
    
    
    1,795Other cost of sales adjustments
    
    
    4,996
    
    
    
    11,417Increase in cost of sales
    
    $
    (2,601
    )
    
    $
    (4,419
    )
 Inventory and cost of sales restatement adjustments
  10




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CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
   Vendor allowance restatement adjustments
  Other restatement adjustments
  11




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CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 Thirteen Weeks Ended
    
    
    Twenty-Six Weeks EndedJuly 31, 2005
    
    
    July 31, 2005Decrease in operating lease expense
    
    $
    1,131
    
    
    $
    2,261Increase in depreciation expense
    
    
    (565
    )
    
    
    (1,113
    )Increase in store fixtures and supplies
    
    
    (231
    )
    
    
    (174
    )Decrease (increase) in employee compensation and benefits
    
    
    91
    
    
    
    (335
    )Other
    
    
    (539
    )
    
    
    (892
    )Increase in operating and administrative expense
    
    $
    (113
    )
    
    $
    (253
    )Increase in
capital lease interest expense
    
    $
    (206
    )
    
    $
    (430
    )Decrease in other interest expense
    
    
    67
    
    
    
    135Increase in interest expense
    
    $
    (139
    )
    
    $
    (295
    )
  
    
    Consolidated Statement of Operations for the thirteen weeks ended July 31, 2005;
    
    Consolidated Statement of Operations for the twenty-six weeks ended July 31, 2005; and
    
    Consolidated Statement of Cash Flows for the twenty-six weeks ended July 31, 2005.
 12




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CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THIRTEEN WEEKS ENDED JULY 31, 2005
 Net Sales,As Previously
    
    Inventory and
    
    Vendor
    
    
    
    
    
    AsReported
    
    Cost of Sales
    
    Allowances
    
    Other
    
    RestatedNet sales
    
    $
    419,048
    
    
    $
    7,556
    
    
    $
    
    
    
    $
    
    
    
    $
    426,604Cost of sales
    
    
    226,082
    
    
    
    2,601
    
    
    
    (4,819
    )
    
    
    
    
    
    
    223,864Gross profit
    
    
    192,966
    
    
    
    4,955
    
    
    
    4,819
    
    
    
    
    
    
    
    202,740Operating and administrative
    
    
    160,947
    
    
    
    (31
    )*
    
    
    
    
    
    
    127
    *
    
    
    161,043Store closing costs
    
    
    654
    
    
    
    
    
    
    
    
    
    
    
    17*
    
    
    
    671Operating profit (loss)
    
    
    31,365
    
    
    
    4,986
    
    
    
    4,819
    
    
    
    (144
    )
    
    
    41,026Interest expense
    
    
    8,300
    
    
    
    
    
    
    
    
    
    
    
    139
    
    
    
    8,439Loss on debt retirement
    
    
    1,600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,600Income (loss) before income taxes
    
    
    21,465
    
    
    
    4,986
    
    
    
    4,819
    
    
    
    (283
    )
    
    
    30,987Income tax expense (benefit)
    
    
    8,407
    
    
    
    1,960
    
    
    
    1,895
    
    
    
    (111
    )
    
    
    12,151Net income (loss)
    
    $
    13,058
    
    
    $
    3,026
    
    
    $
    2,924
    
    
    $
    (172
    )
    
    $
    18,836Basic earnings per share:Net income per share
    
    $
    0.29
    
    
    $
    0.07
    
    
    $
    0.06
    
    
    $
    
    
    
    $
    0.42Shares used in computing
per share amounts
    
    
    45,135
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,135Diluted earnings per share:Net income per share
    
    $
    0.29
    
    
    $
    0.06
    
    
    $
    0.06
    
    
    $
    
    
    
    $
    0.41Shares used in computing
per share amounts
    
    
    45,539
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,539
 
  13




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CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TWENTY-SIX WEEKS ENDED JULY 31, 2005
 Net Sales,As Previously
    
    Inventory and
    
    Vendor
    
    
    
    
    
    AsReported
    
    Cost of Sales
    
    Allowances
    
    Other
    
    RestatedNet sales
    
    $
    816,249
    
    
    $
    15,631
    
    
    $
    
    
    
    $
    
    
    
    $
    831,880Cost of sales
    
    
    443,300
    
    
    
    4,419
    
    
    
    (13,583
    )
    
    
    
    
    
    
    434,136Gross profit
    
    
    372,949
    
    
    
    11,212
    
    
    
    13,583
    
    
    
    
    
    
    
    397,744Operating and administrative
    
    
    318,830
    
    
    
    786
    *
    
    
    
    
    
    
    (579
    )*
    
    
    319,037Store closing costs
    
    
    969
    
    
    
    
    
    
    
    
    
    
    
    46
    *
    
    
    1,015Operating profit
    
    
    53,150
    
    
    
    10,426
    
    
    
    13,583
    
    
    
    533
    
    
    
    77,692Interest expense
    
    
    16,870
    
    
    
    
    
    
    
    
    
    
    
    295
    
    
    
    17,165Loss on debt retirement
    
    
    1,600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,600Income before income taxes
    
    
    34,680
    
    
    
    10,426
    
    
    
    13,583
    
    
    
    238
    
    
    
    58,927Income tax expense
    
    
    13,577
    
    
    
    4,098
    
    
    
    5,339
    
    
    
    95
    
    
    
    23,109Net income
    
    $
    21,103
    
    
    $
    6,328
    
    
    $
    8,244
    
    
    $
    143
    
    
    $
    35,818Basic earnings per share:Net income per share
    
    $
    0.47
    
    
    $
    0.14
    
    
    $
    0.18
    
    
    $
    
    
    
    $
    0.79Shares used in computing
per share amounts
    
    
    45,133
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,133Diluted earnings per share:Net income per share
    
    $
    0.46
    
    
    $
    0.14
    
    
    $
    0.18
    
    
    $
    
    
    
    $
    0.78Shares used in computing
per share amounts
    
    
    45,514
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,514
 
  14




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 STATEMENT OF CASH FLOWS
FOR THE TWENTY-SIX WEEKS ENDED JULY 31, 2005
 Net Sales,As Previously
    
    
    Inventory and
    
    
    Vendor
    
    
    
    
    
    
    AsReported
    
    
    Cost of Sales
    
    
    Allowances
    
    
    Other
    
    
    RestatedCash flows provided by (used in) operating activities:Net income
    
    $
    21,103
    
    
    $
    6,328
    
    
    $
    8,244
    
    
    $
    143
    
    
    $
    35,818Adjustments:Depreciation and amortization of property and equipment
    
    
    14,884
    
    
    
    
    
    
    
    
    
    
    
    1,113
    
    
    
    15,997Amortization of other items
    
    
    1,795
    
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    1,802Amortization of deferred financing costs
    
    
    914
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    914Stock-based compensation expense
    
    
    213
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    213Tax benefit relating to exercise of stock options
    
    
    193
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    193Write downs
on disposal of property, equipmentand other assets
    
    
    460
    
    
    
    
    
    
    
    
    
    
    
    195
    
    
    
    655Loss on debt
retirement
    
    
    1,600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,600Deferred income taxes
    
    
    11,644
    
    
    
    4,098
    
    
    
    5,339
    
    
    
    95
    
    
    
    21,176Changes in operating assets and liabilities:Receivables
    
    
    1,293
    
    
    
    2,609
    
    
    
    (19,174
    )
    
    
    (41
    )
    
    
    (15,313
    )Inventories
    
    
    (20,531
    )
    
    
    (19,933
    )
    
    
    3,793
    
    
    
    
    
    
    
    (36,671
    )Prepaid expenses and other current assets
    
    
    6,036
    
    
    
    4,328
    
    
    
    
    
    
    
    139
    
    
    
    10,503Accounts payable
    
    
    37,187
    
    
    
    2,064
    
    
    
    1,798
    
    
    
    (99
    )
    
    
    40,950Accrued payroll, accrued expenses and other current liabilities
    
    
    1,522
    
    
    
    506
    
    
    
    
    
    
    
    235
    
    
    
    2,263Other operating activities
    
    
    732
    
    
    
    
    
    
    
    
    
    
    
    147
    
    
    
    879Net cash provided by operating activities
    
    
    79,045
    
    
    
    
    
    
    
    
    
    
    
    1,934
    
    
    
    80,979Cash flows provided by (used in) investing activities:Capital expenditures
    
    
    (13,656
    )
    
    
    
    
    
    
    
    
    
    
    18
    
    
    
    (13,638
    )Other investing activities
    
    
    (702
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (702
    )Net cash provided by (used in) investing activities:
    
    
    (14,358
    )
    
    
    
    
    
    
    
    
    
    
    18
    
    
    
    (14,340
    )Cash flows provided by (used in) financing activities:Borrowings under senior credit facility  term loan
    
    
    79,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    79,000Payments under senior credit facility  term loan
    
    
    (252,450
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (252,450
    )Payments of debt issuance costs
    
    
    (3,985
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,985
    )Proceeds from 3.375% exchangeable notes
    
    
    110,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    110,000Payments on capital lease obligations
    
    
    (3,744
    )
    
    
    
    
    
    
    
    
    
    
    (1,987
    )
    
    
    (5,731
    )Proceeds from seller financing arrangements
    
    
    1,460
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,460Payments on seller financing arrangements
    
    
    (151
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (151
    )Proceeds from repayment of stockholder receivable
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10Purchase of common stock
    
    
    (25,029
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,029
    )Premium on common stock call option
    
    
    (24,040
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,040
    )Proceeds from exercise of stock options
    
    
    728
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    728Premium from common stock warrants
    
    
    15,850
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,850Other financing activities
    
    
    (136
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (136
    )Net cash used in financing activities:
    
    
    (102,487
    )
    
    
    
    
    
    
    
    
    
    
    (1,987
    )
    
    
    (104,474
    )Net decrease in cash
    
    
    (37,800
    )
    
    
    
    
    
    
    
    
    
    
    (35
    )
    
    
    (37,835
    )Cash and cash equivalents, beginning of period
    
    
    56,548
    
    
    
    
    
    
    
    
    
    
    
    (319
    )
    
    
    56,229Cash and cash equivalents, end of period
    
    $
    18,748
    
    
    $
    
    
    
    $
    
    
    
    $
    (354
    )
    
    $
    18,394
 15




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 Note 3  Accounting Change for Share-Based Compensation
 Share-Based Payment Accounting for Stock Issued to Employees
  2004 Stock and Incentive Plan
    Stock Options
   16




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  Options ExercisableWeighted
    
    
    Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    
    Average
    
    
    Aggregate
    
    
    
    
    
    
    Average
    
    
    AggregateNumber of
    
    
    Grant
    
    
    Fair
    
    
    Intrinsic
    
    
    Options
    
    
    Exercisable
    
    
    IntrinsicShares
    
    
    Price
    
    
    Value
    
    
    Value
    
    
    Exercisable
    
    
    Price
    
    
    ValueBalance at January 29, 2006
    
    
    3,207,409
    
    
    $
    14.31Granted at market price
    
    
    
    
    
    $
    
    
    
    $
    Exercised
    
    
    (20,200
    )
    
    $
    11.43Cancelled
    
    
    (212,110
    )
    
    $
    23.49Balance at July 30, 2006
    
    
    2,975,099
    
    
    $
    13.70
    
    
    
    
    
    
    $
    1,493,000
    
    
    
    2,220,977
    
    
    $
    13.73
    
    
    $
    1,493,000
   Thirteen Weeks
    
    Twenty-Six WeeksJuly 30,
    
    July 31,
    
    July 30,
    
    July 31,2006
    
    2005
    
    2006
    
    2005Cash received
    
    $
    9
    
    
    $
    420
    
    
    $
    265
    
    
    $
    728Tax benefits
    
    $
    
    
    
    $
    107
    
    
    $
    
    
    
    $
    193
  Restricted Stock
  17




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CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  WeightedAverage
    
    
    AggregateNumber of
    
    
    Grant
    
    
    IntrinsicShares
    
    
    Price
    
    
    ValueNon-vested at January 29, 2006
    
    
    137,779
    
    
    $
    14.72Granted
    
    
    
    
    
    $
    Released
    
    
    (21,215
    )
    
    $
    16.07Cancelled
    
    
    (10,691
    )
    
    $
    14.34Non-vested at July 30, 2006
    
    
    105,873
    
    
    $
    14.51
    
    
    $
    1,550,000
 Long-Term Incentive Plan
  Accounting for Stock Appreciation Rights and
Other Variable Stock Option or Award Plans
   18




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 Pro Forma Information
  Thirteen Weeks Ended
    
    Twenty-Six Weeks EndedJuly 31, 2005
    
    July 31, 2005(Restated)
    
    (Restated)Net income  as reported
    
    $
    18,836
    
    
    $
    35,818Add: Stock-based employee compensation expense
included in reported net income, net of related income
taxes
    
    
    67
    
    
    
    135Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related income taxes
    
    
    (521
    )
    
    
    (1,019
    )Net income  pro forma
    
    $
    18,382
    
    
    $
    34,934Earnings per share  basic:As reported
    
    $
    0.42
    
    
    $
    0.79Pro forma
    
    
    0.41
    
    
    
    0.77Earnings per share  diluted:As reported
    
    $
    0.41
    
    
    $
    0.78Pro forma
    
    
    0.40
    
    
    
    0.77As reported shares:Basic
    
    
    45,135
    
    
    
    45,133Diluted
    
    
    45,539
    
    
    
    45,514Pro forma shares used in calculation:Basic
    
    
    45,135
    
    
    
    45,133Diluted
    
    
    45,551
    
    
    
    45,530
  Thirteen
    
    Twenty-SixWeeks
    
    WeeksEnded
    
    EndedJuly 31,
    
    July 31,2005
    
    2005Dividend yield
    
    0%
    
    0%Risk free interest rate
    
    3.86%
    
    3.86%-3.98%Expected life of options
    
    6
    
    6Expected volatility
    
    29.15%
    
    29.15%-33.36%
 Dividend Yield
 Risk-Free Interest Rate
 Expected Life Share Based Payment
 Expected Volatility
 19




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  Transition Election
Related to Accounting for the Tax Effects of Share-Based Payment
Awards
 Note 4  Recent Accounting Pronouncements
 Accounting for Certain Hybrid Financial
Instrumentsan amendment of FASB Statements No. 133 and 140 Accounting for Derivative
Instruments and Hedging Activities Application of Statement 133
to Beneficial Interests in Securitized Financial Assets Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilitiesa Replacement of FASB Statement
No. 125
 Accounting for Servicing of Financial Assets  an
amendment of FASB Statement No. 140 Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities
 Accounting for Uncertainty in Income
Taxes Accounting for
Income Taxes.
 Note 5  Business Acquisition
  Business
Combinations
 20




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  Cash and cash equivalents
    
    $
    480Receivables
    
    
    2,963Inventories
    
    
    51,363Deferred income taxes
    
    
    3,628Prepaids and other assets
    
    
    2,87261,306Property and equipment
    
    
    20,041Trade name and trademarks
    
    
    49,400Customer relationships
    
    
    370Leasehold interests
    
    
    9,324Goodwill
    
    
    104,541Other long-term assets
    
    
    65Total assets acquired
    
    
    245,047Accounts payable and accrued liabilities
    
    
    36,494Unfavorable leasehold interests
    
    
    7,482Deferred income taxes
    
    
    19,320Other liabilities
    
    
    804Total liabilities assumed
    
    
    64,100Fair value of net assets acquired
    
    $
    180,947
  Note 6  Inventories
  
    
    We reduce the FIFO carrying value of our inventory for estimated loss due to shrinkage
since the most recent physical inventory. Our store shrinkage estimates are determined by
dividing the shrinkage loss based on the most recent physical inventory by the sales for that
store since its previous physical inventory. That percentage is multiplied by sales since the
last physical inventory through period end. Our shrinkage expense for the thirteen and
twenty-six weeks ended July 30, 2006 was approximately $8.9 million and $17.1 million,
respectively, and approximately $8.2 million and $15.2 million for the thirteen and
twenty-six weeks ended July 31, 2005, respectively. While the shrinkage accrual is based on
recent experience, there is a risk that actual losses may be higher or lower than expected.
    
    In certain instances, we retain the right to return obsolete and excess merchandise
inventory to our vendors. In situations where we do not have a right to return, we record an
allowance representing an estimated loss for the difference between the cost of any obsolete
or excess inventory and the estimated retail selling price. Inventory levels and margins
earned on all products are monitored monthly. Quarterly, we make an assessment if we expect
to sell any significant amount of inventory below cost and, if so, estimate the amount of
allowance to record.
  21




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 July 30,
    
    
    January 29,2006
    
    
    2006FIFO Cost
    
    $
    583,999
    
    
    $
    559,359Administrative and overhead costs
    
    
    28,233
    
    
    
    31,679Vendor allowances
    
    
    (75,851
    )
    
    
    (67,959
    )Shrinkage
    
    
    (17,923
    )
    
    
    (12,488
    )Obsolescence
    
    
    (1,115
    )
    
    
    (2,084
    )Net inventory
    
    $
    517,343
    
    
    $
    508,507
 Note 7  Property and Equipment
  July 30,
    
    
    January 29,2006
    
    
    2006
    
    
    Estimated Useful lifeLand
    
    $
    348
    
    
    $
    348Bulidings
    
    
    14,626
    
    
    
    14,198
    
    
    15 - 25 yearsLeasehold improvements
    
    
    151,257
    
    
    
    146,690
    
    
    Shorter of lease term or useful lifeFurniture, fixtures and equipment
    
    
    166,441
    
    
    
    164,745
    
    
    3 - 10 yearsProperty under capital leases
    
    
    95,221
    
    
    
    94,220
    
    
    5 - 15 years or life of leasePurchased software
    
    
    10,395
    
    
    
    9,141
    
    
    5 years438,288
    
    
    
    429,342Less: accumulated depreciation and
amortization
    
    
    (268,100
    )
    
    
    (255,230
    )Property and equipment, net
    
    $
    170,188
    
    
    $
    174,112
   Note 8  Goodwill and Other Intangible Assets
 Goodwill and Other Intangible Assets
  22




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
    Carrying
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    CarryingValue as of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Value as ofJanuary 29, 2006
    
    
    Additions
    
    
    Amortization
    
    
    Adjustments
    
    
    July 30, 2006Amortized intangible assets:Leasehold interests
    
    $
    28,556
    
    
    
    
    
    
    
    
    
    
    
    (44
    )
    
    $
    28,512Accumulated amortization
    
    
    (10,111
    )
    
    
    
    
    
    
    (920
    )
    
    
    44
    
    
    
    (10,987
    )18,445
    
    
    
    
    
    
    
    (920
    )
    
    
    
    
    
    
    17,525License agreement
    
    
    4,417
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,417Accumulated amortization
    
    
    (631
    )
    
    
    
    
    
    
    (316
    )
    
    
    
    
    
    
    (947
    )3,786
    
    
    
    
    
    
    
    (316
    )
    
    
    
    
    
    
    3,470Tradenames and trademarks
    
    
    49,400
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49,400Accumulated amortization
    
    
    (190
    )
    
    
    
    
    
    
    (824
    )
    
    
    
    
    
    
    (1,014
    )49,210
    
    
    
    
    
    
    
    (824
    )
    
    
    
    
    
    
    48,386Customer relationships
    
    
    370
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    370Accumulated amortization
    
    
    (4
    )
    
    
    
    
    
    
    (18
    )
    
    
    
    
    
    
    (22
    )366
    
    
    
    
    
    
    
    (18
    )
    
    
    
    
    
    
    348Amortized intangibles, net
    
    
    71,807
    
    
    
    
    
    
    
    (2,078
    )
    
    
    
    
    
    
    69,729Unamortized intangible assets:Goodwill
    
    
    223,507
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    223,507Total intangible assets, net
    
    $
    295,314
    
    
    $
    
    
    
    $
    (2,078
    )
    
    $
    
    
    
    $
    293,236
  Fiscal 2007
    
    $
    4,204Fiscal 2008
    
    
    4,127Fiscal 2009
    
    
    4,050Fiscal 2010
    
    
    3,993Fiscal 2011
    
    
    3,947$
    20,321
 Note 9  Store Closing Costs
  Accounting for
Costs Associated with Exit or Disposal Activities.
 23




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
     Twenty-Six Weeks EndedJuly 30,
    
    
    July 31,2006
    
    
    2005(Restated)Balance, beginning of year
    
    $
    7,033
    
    
    $
    7,774Store closing costs:Provision for store closing costs
    
    
    174
    
    
    
    99Other revisions in estimates
    
    
    (96
    )
    
    
    334Accretion
    
    
    151
    
    
    
    210Operating expenses and other
    
    
    452
    
    
    
    372Total store closing costs
    
    
    681
    
    
    
    1,015Payments:Rent expense, net of sublease recoveries
    
    
    (1,226
    )
    
    
    (1,178
    )Occupancy and other expenses
    
    
    (355
    )
    
    
    (419
    )Sublease commissions and buyouts
    
    
    (92
    )
    
    
    (362
    )Total payments
    
    
    (1,673
    )
    
    
    (1,959
    )Ending balance
    
    $
    6,041
    
    
    $
    6,830
  Note 10  Long-Term Debt
 Overview
  24




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  July 30,
    
    
    January 29,2006
    
    
    2006Term loan facility
    
    $
    350,000
    
    
    $
    Senior credit facility
    
    
    64,000
    
    
    
    94,0006.75% senior exchangeable notes, carrying balance decreased in fiscal
2006 by $7.7 million discount in accordance with EITF No. 06-6
    
    
    92,310
    
    
    
    100,0007% senior subordinated notes, carrying balance decreased in fiscal 2005
by $6.7 million relating to SFAS No. 133 hedge accounting adjustment
    
    
    40
    
    
    
    218,2793.375% senior exchangeable notes
    
    
    
    
    
    
    125,000Seller financing arrangements
    
    
    12,910
    
    
    
    12,709Total debt
    
    
    519,260
    
    
    
    549,988Less: Current portion of term loan facility
    
    
    2,618
    
    
    
    Senior credit facility(1)
    
    
    7,500
    
    
    
    42,000Current maturities of seller financing arrangements
    
    
    531
    
    
    
    465Total debt (non-current)
    
    $
    508,611
    
    
    $
    507,523
 
 (1)
    
    This portion of the revolving line of credit represents the
actual paydown in
the following 12-month period. Fiscal 2006 Refinancing Transactions
 3 8 3 8 3 8 5 8 5 8
 Fiscal 2005 Financing Transactions
 3 8 3 8 5 8 3 8 5 8
 Term Loan Facility
 3 8
 25




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
   Senior Credit Facility  Revolving Line of Credit
     4 5 / 8 % Notes Refinanced into 6 3/4% Notes
 5 8 5 8 5 8 5 8 3 4 1 2 3 4
 26




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 3 4 Debtors Accounting for a
Modification (or Exchange) of Convertible Debt Instruments 3 4
 3 4 3 4 3 4
 Terms
    
    
    6 3/4% NotesInterest Rate
    
    
    6.75% per year until December 15, 2010; 6.50% thereafterExchange Rate
    
    
    60.6061 shares per $1,000 principal (equivalent to an initial exchange price of approximately $16.50 per share)Maximum CSK shares exchangeable
    
    
    6,060,610 common shares, subject to adjustment in certain circumstancesMaturity date
    
    
    December 15, 2025Guaranteed by
    
    
    CSK Auto Corporation and all of Autos present and future domestic subsidiaries, jointly and severally, on a senior basisDates that the noteholders may
require Auto to repurchase some or
all for cash at a repurchase price
equal to 100% of the principal
amount of the notes being
repurchased, plus any accrued and
unpaid interest
    
    
    December 15, 2010, December 15, 2015,
and December 15, 2020 or following a
fundamental change as described in the
indentureIssuance costs being amortized over
a 5-year period, corresponding to
the first date the noteholders could
require repayment
    
    
    $3.7 millionAuto will not be able to redeem notes
    
    
    Prior to December 15, 2010Auto may redeem for cash some or all
of the notes
    
    
    On or after December 15, 2010, upon at
least 35 calendar days noticeRedemption price
    
    
    Equal to 100% of the principal amount plus any accrued and unpaid interest and additional interest, if any, to, but not including, the redemption date
 3 4
 
    
    During any fiscal quarter (and only during that fiscal quarter) commencing after January
29, 2006, if the last reported sale price of our common stock is greater than or equal to
130% of the exchange price for at least 20 trading days in the period of 30 consecutive
trading days ending on the last trading day of the preceding fiscal quarter;
    
    If the 6 3/4% Notes have been called for redemption by Auto; or
    
    Upon the occurrence of specified corporate transactions, such as a change in control, as
described in the indenture under which the 6 3/4% Notes were issued.
 3 4
 Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Companys Own Stock
 27




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 3 4 3 4 3 4
 3 4 3 4 3 4 3 4 3 4
 7% Notes
    3 3 / 8 % Notes
 3 8
 3 8 3 8 3 8
 28




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 Terms
    
    
    3 3/8% NotesInterest Rate
    
    
    3.375% per year until August 15, 2010; 3.125% thereafterExchange Rate
    
    
    43.3125 shares per $1,000 principal (equivalent to an
initial exchange price of approximately $23.09 per share)Maximum CSK shares exchangeable
    
    
    5,414,063 common shares, subject to adjustment in
certain circumstancesMaturity date
    
    
    August 15, 2025Guaranteed by
    
    
    CSK Auto Corporation and all of Autos present and
future domestic subsidiaries, jointly and severally, on
a senior basisDates that the noteholders may require Auto to
repurchase some or all for cash at a repurchase
price equal to 100% of the principal amount of
the notes being repurchased, plus any accrued
and unpaid interest
    
    
    August 15, 2010, August 15, 2015, and August 15, 2020
or following a fundamental change as described in the
indentureIssuance costs being amortized over a 5-year
period, corresponding to the first date the
noteholders could require repayment
    
    
    $4.8 millionAuto will not be able to redeem notes
    
    
    Prior to August 15, 2010Auto may redeem for cash some or all of the notes
    
    
    On or after August 15, 2010, upon at least 35 calendar
days noticeRedemption price
    
    
    Equal to 100% of the principal amount plus any accrued
and unpaid interest and additional interest, if any,
to, but not including, the redemption date
 3 8
 
    
    During any fiscal quarter (and only during that fiscal quarter) commencing after January
29, 2006, if the last reported sale price of our common stock was greater than or equal to
130% of the exchange price for at least 20 trading days in the period of 30 consecutive
trading days ending on the last trading day of the preceding fiscal quarter;
    
    If the 3 3/8% Notes had been called for redemption by Auto; or
    
    Upon the occurrence of specified corporate transactions, such as a change in control, as
described in the indentures under which the 3 3/8% Notes were issued.
 3 8
 3 8 3 8 3 8 3 8
 Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys
Own Stock
 29




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  3 8 3 8 3 8
 3 8 3 8 3 8 3 8 3 8
 Seller Financing Arrangements
 The
Effect of Lessee Involvement in Asset Construction.
 Debt Covenants
   30




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CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 Note 11  Earnings per Share
  Thirteen Weeks Ended
    
    Twenty-Six Weeks EndedJuly 30,
    
    July 31,
    
    July 30,
    
    July 31,2006
    
    2005
    
    2006
    
    2005(Restated)
    
    
    
    
    
    (Restated)Numerator for basic and diluted earnings per share:Net income (loss)
    
    $
    (5,817
    )
    
    $
    18,836
    
    
    $
    4,374
    
    
    $
    35,818Denominator for basic earnings per share:Weighted average shares outstanding (basic)
    
    
    43,855
    
    
    
    45,135
    
    
    
    43,849
    
    
    
    45,133Denominator for diluted earnings per share:Weighted average shares outstanding (basic)
    
    
    43,855
    
    
    
    45,135
    
    
    
    43,849
    
    
    
    45,133Effect of dilutive securities
    
    
    
    
    
    
    404
    
    
    
    277
    
    
    
    381Weighted average shares outstanding (diluted)
    
    
    43,855
    
    
    
    45,539
    
    
    
    44,126
    
    
    
    45,514Shares excluded as a result of anti-dilution:Stock options
    
    
    2,256
    
    
    
    339
    
    
    
    2,216
    
    
    
    379
 3 4
 Note 12  Legal Matters
 Audit Committee Investigation and Restatement of the Consolidated Financial Statements
 Overview
   
    
    recording of improper accounting entries as directed by certain personnel;
    
    inappropriate override of, or interference with, existing policies, procedures and internal controls;
    
    withholding of information from, and providing of improper explanations and supporting
documentation to, the Companys Audit Committee and Board of Directors, as well as its
internal auditors and independent registered public accountants; and
    
    discouraging employees from raising accounting related concerns and suppressing
accounting related concerns and suppressing accounting related inquiries that were made.
   31




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  Background
      32




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
   Securities Class Action Litigation
 Communications Workers of America Plan for Employees Pensions and Death Benefits v.
CSK Auto Corporation, et al. (Communications Workers) Wilfred
Fortier v. CSK Auto Corporation, et al. Communications Workers
 Shareholder Derivative Litigation
  33




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 SEC Investigation
  Other Litigation
     Note 13  Subsequent Events
 3 8
 34




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CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
   3 4 3 4 3 4
 35




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion and analysis of financial condition and results of operations should
be read in conjunction with our consolidated historical financial statements and the notes to those
statements that appear elsewhere in this report. Our discussion contains forward-looking statements
based upon current expectations that involve risks and uncertainties, such as our plans,
objectives, expectations and intentions. Actual results and the timing of events could differ
materially from those anticipated in these forward-looking statements as a result of a number of
factors, including those set forth or referenced under Note Concerning Forward Looking
Information above.
  Overview
  
    
    Checker Auto Parts, founded in 1969, with 448 stores in the Southwestern, Rocky Mountain
and Northern Plains states and Hawaii;
    
    Schucks Auto Supply, founded in 1917, with 225 stores in the Pacific Northwest and Alaska;
    
    Kragen Auto Parts, founded in 1947, with 498 stores primarily in California; and
    
    Murrays Discount Auto Stores, founded in 1972, with 120 stores in the Midwest.
   Significant Events
  Audit Committee Investigation and Restatement of the Consolidated Financial Statements
  36




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##### Table of Contents



Fiscal 2005 Financing Transactions
 3 8 (3
3/8%
Notes) 3 8 5 8 5 8 3 8 5 8
 Fiscal 2006 Refinancing
   Results of Operations
  37




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##### Table of Contents



Thirteen Weeks Ended
    
    Twenty-Six Weeks EndedJuly 30,
    
    July 31,
    
    July 30,
    
    July 31,2006
    
    2005
    
    2006
    
    2005(Restated)
    
    
    
    
    
    (Restated)Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    52.4
    %
    
    
    52,5
    %
    
    
    53.0
    %
    
    
    52.2
    %Gross profit
    
    
    47.6
    %
    
    
    47.5
    %
    
    
    47.0
    %
    
    
    47.8
    %Other costs and expenses:Operating and administrative
    
    
    40.8
    %
    
    
    37.7
    %
    
    
    40.1
    %
    
    
    38.4
    %Investigation and restatement costs
    
    
    2.4
    %
    
    
    
    
    
    
    1.6
    %
    
    
    Store closing costs
    
    
    0.1
    %
    
    
    0.2
    %
    
    
    0.1
    %
    
    
    0.1
    %Operating profit
    
    
    4.2
    %
    
    
    9.6
    %
    
    
    5.2
    %
    
    
    9.3
    %Interest expense
    
    
    2.3
    %
    
    
    2.0
    %
    
    
    2.2
    %
    
    
    2.1
    %Loss on debt retirement
    
    
    4.0
    %
    
    
    0.4
    %
    
    
    2.0
    %
    
    
    0.2
    %Income (loss) before income taxes and cumulative
effect of change in accounting principle
    
    
    (2.0
    %)
    
    
    7.2
    %
    
    
    0.9
    %
    
    
    7.0
    %Income tax expense (benefit)
    
    
    (0.8
    %)
    
    
    2.8
    %
    
    
    0.4
    %
    
    
    2.8
    %Income (loss) before cumulative effect of change in
accounting principle
    
    
    (1.2
    %)
    
    
    4.4
    %
    
    
    0.6
    %
    
    
    4.3
    %Cumulative effect of change in accounting
principle, net of tax
    
    
    
    
    
    
    
    
    
    
    0.1
    %
    
    
    Net income (loss)
    
    
    (1.2
    %)
    
    
    4.4
    %
    
    
    0.5
    %
    
    
    4.3
    %
 Thirteen Weeks Ended July 30, 2006 Compared to Thirteen Weeks Ended July 31, 2005
     38




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Twenty-Six Weeks Ended July 30, 2006 Compared to Twenty-Six Weeks Ended July 31, 2005
       39




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Liquidity and Capital Resources
 Overview of Liquidity
  3 4
   3 4
 40




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##### Table of Contents



Second Quarter Fiscal 2006 Transactions
 Senior Credit Facility
    Term Loan Facility
  41




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##### Table of Contents



Repurchase of 7% Notes and Termination of Interest Rate Swap
  Restructuring of 4 5/8% Notes
 Debtors Accounting for a Modification (or Exchange) of
Convertible Debt Instruments
 3 4 3 4
 3 4
 Terms
    
    
    6 3/4% NotesInterest Rate
    
    
    6.75% per year until December 15, 2010; 6.50% thereafterExchange Rate
    
    
    60.6061 shares per $1,000 principal (equivalent to an initial exchange price of approximately $16.50 per share)Maximum CSK shares exchangeable
    
    
    6,060,610 common shares, subject to adjustment in certain circumstancesMaturity date
    
    
    December 15, 2025Guaranteed by
    
    
    CSK Auto Corporation and all of Autos present and future domestic subsidiaries, jointly and severally, on a senior basis
 42




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##### Table of Contents



Terms
    
    
    6 3/4% NotesDates that the noteholders may require Auto
to repurchase some or all for cash at a
repurchase price equal to 100% of the principal
amount of the notes being repurchased, plus any
accrued and unpaid interest
    
    
    December 15, 2010, December 15, 2015, and December 15, 2020 or following a fundamental change as described in the indentureIssuance costs being amortized over a 5-year
period, corresponding to the first date the
noteholders could require repayment
    
    
    $3.7 millionAuto will not be able to redeem notes
    
    
    Prior to December 15, 2010Auto may redeem for cash some or all of the notes
    
    
    On or after December 15, 2010, upon at least 35 calendar days noticeRedemption price
    
    
    Equal to 100% of the principal amount plus any accrued and unpaid interest and
additional interest, if any, to, but not including, the redemption date
 Fiscal 2005 Transactions
 Issuance of 3 3/8% Notes
  43




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##### Table of Contents



Analysis of Cash Flows
       Store Closures
  Accounting for
Costs Associated with Exit or Disposal Activities.
 44




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##### Table of Contents



Twenty-Six Weeks EndedJuly 30,
    
    
    July 31,2006
    
    
    2005(Restated)Balance, beginning of year
    
    $
    7,033
    
    
    $
    7,774Store closing costs:Provision for store closing costs
    
    
    174
    
    
    
    99Other revisions in estimates
    
    
    (96
    )
    
    
    334Accretion
    
    
    151
    
    
    
    210Operating expenses and other
    
    
    452
    
    
    
    372Total store closing costs
    
    
    681
    
    
    
    1,015Payments:Rent expense, net of sublease recoveries
    
    
    (1,226
    )
    
    
    (1,178
    )Occupancy and other expenses
    
    
    (355
    )
    
    
    (419
    )Sublease commissions and buyouts
    
    
    (92
    )
    
    
    (362
    )Total payments
    
    
    (1,673
    )
    
    
    (1,959
    )Ending balance
    
    $
    6,041
    
    
    $
    6,830
  Factors Affecting Liquidity and Capital Resources
 Sales Trends
  Inflation
  45




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##### Table of Contents



Debt Covenants
    3 4
  46




---



##### Table of Contents



Interest Rates
   Critical Accounting Matters
  Recent Accounting Pronouncements
 Accounting for Certain Hybrid Financial
Instrumentsan amendment of FASB Statements No. 133 and 140 Accounting for Derivative
Instruments and Hedging Activities Application of Statement 133
to Beneficial Interests in Securitized Financial Assets Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilitiesa Replacement of FASB Statement
No. 125
 Accounting for Servicing of Financial Assets  an
amendment of FASB Statement No. 140 Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities
 Accounting for Uncertainty in Income
Taxes Accounting for
Income Taxes.
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  47




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Item 4. Controls and Procedures
   MATERIAL WEAKNESS IN INTERNAL CONTROL OVER FINANCIAL REPORTING
   Control Environment:
  a) Accounting for Inventory
 b) Accounting for Vendor Allowances
 48




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##### Table of Contents



c) Accounting for Certain Accrued Expenses
 d) Accounting for Store Fixtures and Supplies
 Resources, and Policies and Procedures to Ensure Proper and Consistent Application of
GAAP:
 a) Accounting for Leases
 b) Allowance for Sales Returns
 c) Accounting for Certain Accrued Expenses
  PLAN FOR REMEDIATION OF MATERIAL WEAKNESSES
 Remediation Initiatives
  49




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Control Environment:
 General
     Accounting for Inventory
 50




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##### Table of Contents



Accounting for Vendor Allowances
 
    
    The Company has enhanced its review and approval processes to ensure review by
appropriate members of management of critical information necessary to assess vendor
allowance collections and the proper recognition of vendor allowances in the
appropriate periods.
    
    The Company plans to reevaluate and enhance its contract review process, including
training of merchandising, finance and legal staffs, as well as formalizing the
communication process among the three groups, to better provide for timely
identification of potential issues and accurate accounting treatment. The Company also
plans to implement enhanced processes and procedures so that its merchandising, finance
and legal staffs have adequate information to conduct their review and provide
meaningful input and communication during the contract negotiation process to allow for
accurate accounting treatment for both standard and non-standard contracts.
    
    The Company plans to conduct training for its merchandising, finance and legal
staffs relative to vendor arrangements, including contract provisions and construction,
the impact of amendments and side and ancillary agreements and accounting treatment of
related vendor allowances.
    
    The Company has consolidated the oversight and accounting for all vendor allowance
financial transactions under one senior accounting manager to provide for consistent
application with respect to the accounting for vendor allowances.
 Accounting for Certain Accrued Expenses
 Accounting for Store Fixtures and Supplies
 Resources and, Policies and Procedures to Ensure Proper and Consistent Application of
GAAP:
 General
  51




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##### Table of Contents



Accounting for Leases
 Allowance for Sales Returns
 Interim Measures Pending Completion of Remediation Initiatives
  
    
    The fiscal 2006 quarterly reporting processes was extended, allowing the Company to
conduct additional analyses and procedures and make additional adjustments as necessary
to ensure the accuracy of financial reporting through July 30, 2006.
    
    Where the Company identified the existence of a material weakness, the Company has
performed extensive substantive procedures to ensure that affected amounts are fairly
stated for all periods presented in this Quarterly Report.
    
    The Company retained, on an interim basis, numerous experienced accounting
consultants, other than the Companys independent registered public accounting firm,
with relevant accounting experience, skills and knowledge, working under the
supervision and direction of the Companys management, to assist with the fiscal 2006
quarterly reporting process.
    
    The Company conducted a detailed and extensive review of account reconciliations,
non-routine transactions and agreements, financial statement classifications,
spreadsheets, and journal entries and related substantiation for accuracy and
conformance with GAAP.
 Control deficiencies not constituting material weaknesses
  Managements conclusions
  52




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##### Table of Contents



CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
  53




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
 PART II
 OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 6. Exhibits
  54




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##### Table of Contents



SIGNATURE
  CSK Auto CorporationDATED:
August 15, 2007
    
    
    
    By:
    
    /s/ Steven L. KorbySteven L. KorbyInterim Chief Financial Officer
 55




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description3.01
    
    Restated Certificate of Incorporation of the Company, incorporated
herein by reference to Exhibit 3.01 of our Annual Report on Form
10-K, filed on May 4, 1998 (File No. 001-13927).3.02
    
    Certificate of Correction to the Restated Certificate of
Incorporation of the Company, incorporated herein by reference to
Exhibit 3.02 of our Annual Report on Form 10-K, filed on May 4,
1998 (File No. 001-13927).3.03
    
    Certificate of Amendment to the Restated Certificate of
Incorporation of CSK Auto Corporation, incorporated herein by
reference to Exhibit 3.2.1 of our Quarterly Report on Form 10-Q,
filed on September 18, 2002 (File No. 001-13927).3.04
    
    Second Certificate of Amendment of the Restated Certificate of
Incorporation of CSK Auto Corporation, incorporated herein by
reference to Exhibit 3.04 of our Quarterly Report on Form 10-Q,
filed on December 9, 2005 (File No. 001-13927).3.05
    
    Amended and Restated By-laws of the Company, incorporated herein
by reference to Exhibit 3.03 of our Annual Report on Form 10-K,
filed on April 28, 1999 (File No. 001-13927).3.05.1
    
    First Amendment to Amended and Restated By-laws of the Company,
incorporated herein by reference to Exhibit 3.03.1 of our annual
report on Form 10-K, filed on May 1, 2001. (File No 001-13927).3.05.2
    
    Second Amendment to Amended and Restated By-laws of the Company,
incorporated herein by reference to Exhibit 3.03.2 of our
Quarterly Report on Form 10-Q, filed on June 14, 2004 (File No.
001-13927).4.01
    
    Third Supplemental Indenture, dated as of June 30, 2006, among CSK
Auto, Inc., CSK Auto Corporation, CSKAUTO.COM, Inc., and The Bank
of New York Trust Company, N.A., as Trustee, incorporated herein
by reference to Exhibit 4.1 of our Current Report on Form 8-K,
filed on July 7, 2006 (File No. 001-13927).4.02
    
    Second Supplemental Indenture, dated as of July 27, 2006, among
CSK Auto, Inc., CSK Auto Corporation, CSKAUTO.COM, Inc., and The
Bank of New York Trust Company, N.A., as Trustee, incorporated
herein by reference to Exhibit 4.1 of our Current Report on Form
8-K, filed on July 31, 2006 (File No. 001-13927).10.01
    
    Term Credit Agreement, dated as of June 30, 2006, among CSK Auto,
Inc., the Lenders party thereto, JPMorgan Chase Bank, N.A., as
Administrative Agent, and Lehman Commercial Paper Inc. and
Wachovia Bank, N.A., as Co-Syndication Agents, incorporated herein
by reference to Exhibit 10.1 of our Current Report on Form 8-K,
filed on July 7, 2006 (File No. 001-13927).31.01*
    
    Certification by the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.31.02*
    
    Certification by the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.32.01*
    
    Certification of the Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.99.01
    
    Waiver, dated as of May 4, 2006, to Second Amended and Restated
Credit Agreement, dated as of July 25, 2005, among CSK Auto, Inc.,
the lenders party thereto and JPMorgan Chase Bank, N.A., as
administrative agent, incorporated herein by reference to Exhibit
99.2 of our Current Report on Form 8-K, filed on May 23, 2006
(File No. 001-13927).99.02
    
    Second Waiver, dated as of June 16, 2006, to the Second Amended
and Restated Credit Agreement, dated as of July 25, 2005, among
CSK Auto, Inc., the Lenders party thereto, the Co-Syndication
Agents and the Co-Documentation Agents party thereto, and JPMorgan
Chase Bank, N.A., as Administrative Agent, incorporated herein by
reference to Exhibit 99.3 of our Current Report on Form 8-K, filed
on June 19, 2006 (File No. 001-13927).
 
 *
    
    Filed herewith. 56